Prime Cost Control

Climbing commodities, fewer diners, eroding economy: does it spell “d-o-o-m” for your pizzeria? Not if you take control o your crucial costs — those that we can control on a daily basis. The total of these controllable costs are termed “Prime Cost.” Simply put, prime cost equals the sum of your food and labor costs. These expenses need to be monitored with the vigilance of Scrooge McDuck. Prime cost is typically expressed as a percentage; ideally 60 percent or lower. This percentage is found by adding our total food cost and labor cost together, then dividing that number by total gross sales.

Let’s start with food cost, which is the sum of all the ingredients used to create your product. Most operators include boxes and paper in this category. I like to advise m peers to manage from the front door, not the back. Cutting quality is a sure way to cut customer counts. That being said, how can you control food costs?

Begin by buying smart. Secure a prime vendor agreement instead of using your time and money to shop around for the best price. In this kind of agreement, the distributor seeks to obtain a high percentage (90 percent) of the operator’s purchasing in exchange for preferred pricing for key items. Big Dave Ostrander espouses this benefit.“

“I have monitored almost every client I assisted in negotiating their Prime Vendor Agreement,” he says. “The majority of them see an instant five percent reduction. When the numbers are in at the end of the year, the clients realize more like an eight percent improvement in food purchases.”

You also should weigh the benefits of having an exclusive contract with minor vendors, such as your beverage or produce provider. This tactic is called “recession partnering.” For example, by exclusively carrying one particular soda company’s products I can save dollars per case and benefit from rebates, signage and free point-of-sale materials. I not only lower my cost this way, but I also increase my sales — thus lowering my prime cost percentage. Additionally, it also allows me to lower my inventory.

Our next recommended step is to create recipe-costing cards for every item on your menu. Consultant David Scott Peters of TheRestaurantExpert.com says: “Include everything down to a single piece of lettuce. Making these cards and training everyone to religiously use them eliminates waste and over-portioning. Plus, it provides a great training too.”

Take a long, hard look at your menu. Run a few reports through your POS system. Combine your recipe costing cards with your POS reports. Examine closely to see what items are ordered most often and how much they cost you to make versus what your profit margin on them happens to be. You’ll see the poor performers on your menu. These are the ones that don’t sell or that lose you money. They need to go! You want popular, high-profit menu items only.

Once you identify these menu VIPs, highlight them. Encourage customers to purchase them. You may need to work with a professional menu-design company to achieve the best results, but it will be a worthwhile investment.

Next, let’s focus on labor. Cutting customer service is a sure way to cut traffic, it’s important to hire and effectively train the right people. Jim Laube, president of RestaurantOwner.com, recommends a series of interview questions that give insight. When you ask, “Do you enjoy serving and taking care of other people?,” your potential hire will likely answer in the affirmative. So follow up with this: “Describe one or two instances in which you served or cared for someone else and it was particularly gratifying.”

If the response is genuine, the applicant should be able to provide you with specifics. Listen for positive feelings created though the act of doing something special for others. Hiring people who love to take care of others helps create positive experiences and gives their guests another reason to come back again.

Since training an employee is estimated to cost upwards of $1,500, can we really afford turnover? For that reason, it’s important to train with an eye to developing key people who will stand out as superstars. Like grooming a child to eventually take over the business, we need to set clear guidelines and expectations for our key employees. While we don’t have to open up the books for them, we do need to explain how and why things are done as this has a direct effect on whether you have any cash in the bank to pay bills, make payroll and take home.

Is it possible to trim some payroll hours? Probably. What you need to do is measure productivity by comparing sales per hour versus the labor cost per hour. You need to do this for each day of the week, every hour of the day. This will allow you manage the flow and not be understaffed or overstaffed.

Remember that your total labor cost is made up of all wages plus taxes, benefits and payroll insurances. While taxes and insurance are regulated, there are ways to lower your costs. Ohio Restaurant Association member Ann Reichle encourages operators to belong to trade communities. “It saves me over $1,000 annually on workers’ compensation alone,” she says.

In closing, Prime Cost Percentage is the one number every operator must pay attention to. Daily monitoring of costs will help you catch a problem before it turns into a major revenue loss.